Tax planning is the practice of understanding the applicable laws and regulations by which a person or business will be taxed, and making decisions to minimize the amount of tax owed. Legally, it typically includes finding ways to take advantage of tax credits, deductions and other legal benefits, such as increasing contributions to a retirement account. It’s important to note that taking advantage of all available legal tax benefits is an entirely legitimate and accepted practice, and is encouraged by the Revenue department also. Some advised given below to reduce you corporate tax:
1. Understand the Current Tax System: The first step in properly planning your corporate taxes is to understand the current tax system. Understand any credits available for certain types of activities, deductions and other exemptions that could affect your tax liability. Familiarize yourself with the federal, state, and local income tax laws to determine any breaks, deductions, and credits that could affect your current year’s income taxes.
2. Know Your Business Structure: Understanding your business structure is key to implementing any tax-minimizing strategies. Identify whether it is a sole proprietorship, partnership, corporation, or LLC.
3. Keep Good Records: Good record keeping is a critical component to all successful tax planning. Document all purchases, sales, income, and expenses so everything is tracked and accounted for accurately. Keep your financial information in an organized fashion so it will be easier to file the corporate tax returns. The more organized your records are, the less time it will take to complete your tax returns.
4. Utilize Tax Savings Strategies: Tax planning allows businesses to utilize strategic activities to reduce their taxes. A strategy such as deferring income can help reduce tax liability by allowing you to spread out income over multiple years. Strategies such as donating to charity or taking advantage of tax credits can also help reduce tax liability. Additionally, consider investments in cost-saving items like energy or industrial-efficiency equipment which offer certain tax deductions.
5. Estimate Your Tax Liability: Once you understand the current tax system, have a good record keeping system in place, and have identified strategic activities to help lessen the overall tax liability, the next step is to estimate your actual tax liability. Identify how the business income will be taxed based on its legal form and the individual owners’ income brackets. Estimate how much the company will owe in taxes so you can plan for the appropriate amount of funds to be allocated for taxes.
6. Make Changes and Monitor: Once your taxes have been calculated, it is important to take action to reduce your tax liability and adjust as necessary. Monitor your tax liability as your business changes and make appropriate adjustments in order to keep your liability to a minimum and comply with tax laws.
7. File Your Returns: Finally, when tax time comes around, be sure to file your tax returns accurately and on time. Failure to pay taxes on time can incur serious penalties so it is important to make sure the returns are filled out properly. Follow the instructions on the income tax forms and submit the tax return to the respective government agency.
8. Utilize Tax-Deductible Expenses: Maximize the list of eligible expenses you can use to reduce your taxes. This includes employee-related expenses, travel, advertising, office supplies, etc.
9. Calculate Your Depreciation Reimbursement: Calculate the amount you can depreciate on your business equipment and other property investments. This way, you can reclaim a portion of the costs from taxes each year.
10. Take Advantage of Business Tax Credits: Use available and applicable business tax credits for your company. These include research and development credits, federal payroll tax credits, disability access credits, etc.
11. Compare Tax Strategies: Regularly compare various tax strategies and identify the ones that best suit your business. Consider different taxation rates, thresholds, and deferral options across the different tiers of your business.
12. Utilize Retirement Plans: Make contributions to retirement plans like 401Ks, Roth IRAs and traditional IRAs. This will help you reduce your current tax claims and defer the taxable income until a later date.
13. Consider Professional Tax Advice: Once you have an estimate of how much your business will owe in taxes, it is important to obtain professional tax advice. A professional chartered accountant will be able to review your calculations, advise of any tax law changes and suggest the best options available to help minimize your tax liability. Utilize the help of industry-specific tax experts and consultants. They can help analyze your existing strategies and source further strategies to help you minimize your taxes.
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Disclaimer: “Neither this article nor the information contained herein shall in any way be construed as forming a contract or shall constitute professional advice required before acting upon any matter. CA Sharad Kumar Sharma has taken all due care in the preparation of this article for accuracy in its contents at the time of publication. However, no liability shall be accepted by him in the event of any direct, indirect or consequential damages arising out of or in any way connected with the use of this article or its contents. “
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